3 things will boost the case for multiple rate cuts in 2025, $5 trillion asset manager says

The Federal Reserve could surprise investors with more interest rate cuts than they're expecting in 2025, according to State Street. Michael Arone, chief investment strategist at the $4.7 trillion asset manager, said in a Tuesday note that he expects the central bank to deliver more than the single 25-basis interest rate cut being priced in by markets.

Interest rate expectations have fluctuated wildly in recent months, as stubborn inflation, a hot economy, and the potential impacts of President Donald Trump's policies have challenged the outlook for the Fed's rate-cutting cycle. Just a few months ago, markets were anticipating as many as four interest rate cuts in 2025, but that's since been lowered to just one cut. While the Fed delivered 100 basis points of rate cuts since September, the 10-year US Treasury yield surged by about the same amount.



That has put pressure on both bond and stock prices, especially in December and early January. But Arone doesn't expect these trends to last much longer and instead sees three reasons why interest rates will be pushed lower this year. First, economic growth will probably cool in 2025 after a strong run of GDP expansion in 2023 and 2024.

Earlier this week, the Federal Reserve Bank of Atlanta's GDPNow forecast estimated annual GDP growth of about 3% in the fourth quarter of 2024. That estimate has since plunged to 2.1% to account for new economic data from the US Census Bureau.

If the downward trend continues into 2025, it would raise questions about the strength of the US economy, ultimately putting pressure on US Treasury yields. "It's likely that economic growth will slow this year, putting downward pressure on yields," Arone said. Second, disinflation could resume after the trend petered out in recent months.

That's partly because of easier year-over-year comparisons from the first quarter of 2024, according to Arone. "Hotter-than-expected inflation data from the first quarter of 2024 will be rolling off the year-over-year data soon. That will result in more market-friendly inflation figures in the first quarter of this year," Arone explained.

Additionally, owners' equivalent rent, which makes up a sizable portion of the Consumer Price Index, is slow-moving and has finally shown signs of cooling, Arrone said..